The Organisation for Economic Co-operation and Development (OECD) released the June 2012 results of the OECD Economic Surveys for Canada’s macro-economic state of affairs. The report indicates that the economy is picking up, with a positive outlook for continued moderate output growth and inflation. The OECD also cites innovation as a priority on the government’s agenda.
“Boosting innovation can raise historically weak productivity growth to sustain living standards… Competitive pressures, which spur innovation, have recently intensified because of the high exchange rate, but further market opening in sheltered sectors like network industries and professional services would be beneficial.”
Currently, innovation is lagging in Canada, with limited business R&D productivity and a low patenting quota. Fostering innovation can contribute to healthy multi-factor productivity (MFP) growth; innovation thus emerged as the overarching theme of the survey, with recommendations to improving the current policy framework. The OECD calls for support focused more on “sharpening incentives and raising performance,” through SR&ED strategies like unifying the higher enhanced ITC rate with the lower general ITC rate to encourage companies to grow. The OECD further recommended reinstating capital costs in the eligible expenditure base for SR&ED.
Aside from SR&ED, the OECD recommended subjecting the Industrial Research Assistance Program (IRAP) and other R&D programs to in-depth cost-benefit analysis. One suggestion was to implement user fees as a recovery method for the high costs of expert advice, especially for companies with products on the path to commercialization.
There is no denying that Canada has one of the best programs as far as funding for companies that perform R&D goes. And while it is promoted frequently for Canadian Controlled Private Corporations, there are many other companies that can take advantage of this program.
Take, for instance, an American-owned company that has a branch in Canada. This Canadian branch manufactures custom products for its customers, and regularly has to work through technological obstacles to create the final product that was required.
Because this American-owned company has a branch that operates in Canada, and pays taxes to the Canadian government, this foreign-owned company would be eligible for the Scientific Research and Experimental Development program. Unlike privately-owned businesses, however, this foreign-owned company would be eligible to receive 20% of their claim in the form of tax credits. These tax credits can be applied retrospectively ten years, or can be applied forward three years.
A press release has been issued about some upcoming changes to the SR&ED program. A few points mentioned by Minister Blackburn today, while addressing the 13th Annual Tax Practitioner Information Session, relate to upcoming changes to the SR&ED program:
- starting on April 1st, 2010, reviewers will be spending more time explaining the program (requirements, application process, decisions made, etc) to claimants. Starting on the same date, if the CRA finds a company is missing eligible projects, they will let that company know sooner so they can resubmit their claim within the filing deadline.
- beginning in July, the CRA will be posting quarterly reports on their website as to how long it takes for them to review an SR&ED claim from start to finish.
These changes are a result of some of the feedback they have been receiving about the SR&ED program lately, especially in relation to the consistency of the program.
Minister Blackburn has also said that there will be more changes to the program in the future – we will be reporting on these changes as soon as we have word about them.
We often tell people that failed projects are embraced by the SRED program, and sometimes it can be a little hard to understand exactly why. I mean, isn’t the program meant to promote innovation, and to encourage technological development? If so, then why are projects that don’t result in a more innovative product or process applicable for the SR&ED program?
This goes back to the three criteria of the program: Technological Advancement, Technological Obstacles and Technical Content.
When looking at a failed project, you most likely faced a number of Technological Obstacles while working on it – these obstacles are anything that prevented you from getting to the final objective, so obviously in a failed project you faced a number of obstacles.
The technical content shows the systematic investigation that was done while trying to reach the final objective, which would be done for both failed and successful projects.
Lastly, your knowledge has been expanded in the instance of failed projects as well – in these instances, you now have the knowledge that there is no way that you have found to get to the final objective.
So yes, failed projects definitely qualify for the SR&ED program, as long as they too fulfill the three criteria of the program.
Canadian companies definitely have an advantage when it comes to research and development tax credits. Canada is rated among the Top G20 countries when it comes to Research and Development. The government encourages Canadian companies to do their research in Canada with tax credits and cash back incentives to remain manufacturing in Canada.
Foreign companies can benefit as well. The benefit to a foreign owned company can be the significant reduction or even elimination of their Canadian taxes owed, with the benefit of retaining the rights to the SR&ED program.
Foreign companies become eligible when they become a subsidiary of a foreign parent and can claim 20% tax credits on qualifying SR&ED activities. Another way to become eligible is to become a Canadian-controlled private corporation (CCPC), as long as an owner owns less than 50% of the company’s shares, so the majority of ownership is Canadian. Becoming a CCPC allows the company to claim 35% cash back on qualifying SR&ED activities.
For more information check out this link: http://investincanada.gc.ca/eng/publications/rd-tax-credit-fact-sheet.aspx